WEAKNESSES

RISK ASSESSMENT

Tax reforms to delay the slowdown in growth

Although President Donald Trump was unable to make any progress with any major measures between January and November 2017, activity picked up strongly thanks to the resilience of household consumption and the recovery in housing investment, in a context of high levels of confidence among agents. Growth is expected to remain robust in 2018, mainly because of acceleration in company investments, bolstered by the significant cut in corporation tax from 35% to 21% in President Trump’s tax reforms. Conversely, growth in household consumption is likely to slow, despite the historically low rate of unemployment (around 4%), significant increases in real wages, and the wealth effect generated by rising housing prices. The impact of the reduction in income tax – which will mainly benefit the most wealthy (maximum tax rate cut from 39.7% to 37%) – will be partly offset by a continued tightening of monetary policy, with the Fed planning on three further rises in its key interest rate in 2018. The consequent increase in the cost of credit will mainly be felt by lower income households, with an impact on their consumption. In addition, households’ room for manoeuvre is very limited due to their levels of indebtedness – stable but very high (136% of GDI in Q2 2017) – and the reduction in their savings rate over the last two years (3.2% in October 2017, down -3.1 points in two years). This slowing in demand will mainly hit the retail, clothing, and transport sectors. However, the energy sector will feel the benefits of raising oil prices. This, combined with the growth in wages, is expected to lead to a slight upwards shift in inflation, which will come closer to the Fed’s target (2%). Whilst it is expected to slow at the end of the year, the economy will continue to grow and company insolvencies are expected to be 4% lower in 2018.

With the tax reforms driving up the public deficit, debt will continue on its upwards slope

According to the Congressional Budget Office (CBO), despite the removal of local tax deductions for federal taxes, the tax reform being instituted by President Trump will amount to USD1.4 trillion over ten years – around 7% of GDP. At the same time, the government will also cut social expenditure, notably healthcare (removal of fines for those not having health insurance, which is likely to lead to a fall in the numbers of insured citizens), in order to make savings. The scale of the tax reform will, however, result in an increase in the deficit in 2018, despite any slight associated increase in growth (estimated at 0.25% of GDP). The US public debt, among the largest in the world, should therefore continue to grow.

A large trading deficit financed by foreign savings

The balance of goods is in substantial deficit due to imports of consumer and capital goods. This deficit is partly offset by the surplus in the balance of services and the balance of income, the dividends from US investments in other countries being greater than the transfers of foreign investors and workers. The large current account deficit is currently financed by FDI and portfolio investments. The result is that the external position is a net structural deficit (USD7,935 billion in Q2 2017, approximately 45% of GDP).

While President Trump has a distinct wish to increase protectionism – as can be seen with the abandoning of the Trans-Pacific Partnership (TPP) and the renegotiation of the free-trade agreement with Canada and Mexico (NAFTA) – the external deficit is expected to worsen in 2018 due to the upwards pressure on the dollar – linked with the tighter monetary policy of the Fed – which will reduce the competitiveness of US exports, and the continued buoyancy of imports in the wake of domestic demand, notably from investment.

Critical mid-term elections following the first legislative victory for President Trump

The December 2017 vote on tax reforms was the first legislative victory for President Trump, who has so far experienced considerable difficulties in implementing his programme. This victory was vital for President Trump with the upcoming mid-term elections to be held in November 2018, during which all the seats, in the House of Representatives, as well as one-third of Senate seats will be up for election. Despite a Republican majority in both Houses of Congress, President Trump is already facing a rebellion within the Republican party. A change in the majority during the mid-term elections would make any further reforms almost impossible. The victory of the Democrat candidate in the Senatorial election in Alabama (a traditionally solid Republican State) in December 2017 would seem to indicate that the Democrats could at least win back the Senate.

Last update : January 2018

Payment

Exporters should pay close attention to sales contract clauses on the respective obligations of the parties and determine payment terms best suited to the context, particularly where credit payment obligations are involved. In that regard, cheques and bills of exchange are very basic payment devices that do not allow creditors to bring actions for recovery in respect of “exchange law” (droit cambiaire) as is possible in other signatory countries of the 1930 and 1931 Geneva Conventions on uniform legal treatment of bills of exchange and cheques.

Cheques are widely used but, as they are not required to be covered at their issue, offer relatively limited guarantees. Account holders may stop payment on a cheque by submitting a written request to the bank within fourteen days of the cheque’s issue. Moreover, in the event of default, payees must still provide proof of claim. “Certified checks” offer greater security to suppliers since the bank certifying the cheque thereby confirms the presence of sufficient funds in the account and makes a commitment to pay it. Although more difficult to obtain and therefore less commonplace, “cashier’s checks”, cheques drawn directly on a bank’s own account, provide complete security as they constitute a direct undertaking to pay from the bank.

Bills of exchange and promissory notes are less commonly used and offer no specific proof of debt. The open account system is only justified after a continuing business relationship has been established.

Transfers are used frequently especially via the SWIFT electronic network, to which most American banks are connected, and which provides speedy and low-cost processing of international payments. SWIFT transfers are particularly suitable where real trust exists between the contracting parties, since the seller is dependent on the buyer acting in good faith and effectively initiating the transfer order.

For large amounts, major American companies also use two other highly automated interbank transfer systems – the Clearing House Interbank Payments System (CHIPS), operated by private financial institutions and the Fedwire Funds Service System, operated by the Federal Reserve.

Debt collection

Amicable phase

Since the American legal system is complex and, especially as regards lawyers’ fees, costly, it is advisable to negotiate and settle out of court with customers wherever possible or else hire a collection agency.

Legal proceedings

The judicial system comprises two basic types of court: the federal District Courts with at least one such court in each State and the Circuit or County Courts under the jurisdiction of each State.

Fast-track proceedings

If the debt is certain and undisputed, American law provides for a “summary judgment” procedure, where a motion for “summary judgment” is based upon a claim by one party that all necessary factual issues are settled or that no trial is necessary. It is appropriate when the court determines there are no factual issued remaining to be tried, and therefore a cause of action or all causes of action in the complaint can be decided without a trail. If the judge decides that there are facts in dispute, the court will deny the motion for summary judgment and order a trial.

Ordinary proceedings

The vast majority of proceedings are heard by State courts, which apply state and federal law to disputes falling within their jurisdictions (i.e. legal actions concerning persons domiciled or resident in the State).

Federal courts, on the other hand, rule on disputes involving State governments, cases involving interpretations of the constitution or federal treaties and claims above USD 75,000 US between citizens of different American States or between an American citizen and a foreign national or foreign State body or, in some cases, between plaintiffs and defendants from foreign countries.

A key feature of the American judicial system is the pre-trial “discovery” phase whereby each party, before the main hearing, may demand evidence and testimonies relating to the dispute from the adversary before the court hears the case. During the trial itself, judges give plaintiffs and their lawyers a considerable leeway to produce pertinent documents at any time and conduct the trial in general. This is an adversarial procedure, where the judge has more the role of an arbitrator, ensuring compliance with the procedural rules, although more and more practice enhances the part of the judge in the running of the case.

The “discovery phase” can last several months, even years, and entail high costs due to each adversary’s insistence on constantly providing pertinent evidence (argued by each party), and involve various means – like examinations, requests to provide supporting documents, the testimony of witnesses, and reports by detectives – before submitting them for court approval during the final phase of the proceedings.

In civil cases, the jury determines whether the demand is justified and also determines the penalty to impose on the offender. For especially complex, lengthy or expensive litigation, as in the case of insolvency actions, courts have been known to allow creditors to hold as liable the professionals (e.g. auditors) who have counselled the defaulting party, where such advisors have demonstrably acted improperly.

Enforcement of a legal decision

Domestic judgments, in the United States, give the creditors additional rights such as the seizure and selling of the debtor’s assets or the garnishment of their bank account. As a federal State, decisions rendered in one of the country’s states may be executed in another state’s court, provided that the enforcing court considers that it is competent to enforce any judgement.

For foreign awards, each state has its own legislation. Nevertheless, they must be first recognized as domestic judgments. If a reciprocal recognition treaty exists, the requirement is fulfilled. However, in the absent of one, exequatur proceedings aim at ensuring enforcement in domestic court, after verifying the judgment meets certain criteria provided by the state law.

Insolvency proceedings

Out-of court proceedings

Different State laws can propose out-of court proceedings in order to avoid any formal judicial proceedings, such as the Assignment for the benefit of creditors in the state of California, where a company turns over all of its assets to an independent third party, who liquidates and distributes them to all creditors in an equitable fashion.

Restructuring proceedings: Chapter 11

Chapter 11 of the American Bankruptcy Code provides a distressed entity with the opportunity to preserve its business as a going concern while implementing an operation of financial restructuring. The debtor can seek to adjust its debt by reduction the amount owed or extending repayment terms. The debtor entity and its management continue to operate the business as the debtor-in-possession. The Bankruptcy court supervises the proceedings.

Liquidation under Chapter 7

The purpose of these proceedings is to implement an orderly liquidation of the distressed entity. The court-supervised process involves a trustee selling assets and distributing the proceeds to creditors in accordance with the statutory priorities provided in the Bankruptcy Code as well as pursuing available causes of action. The US Trustee appoints an independent interim trustee to administer the case. The interim trustee holds a meeting of creditors after the petition is filed. He is responsible for liquidating the estate’s assets and distributing the proceeds to the creditors. The Court supervises the proceedings.

State law can also provide different mechanism for liquidation of a debtor’s assets such as receivership.